A “Black Swan” Arrives: Will the Coronavirus Affect Your Vendors?

“Black Swan” events are unexpected, large-scale business disruptions. The Dot-com Crash of 2000, the 9/11 terrorist attacks, the Great Recession, and the Fukushima nuclear disaster of 2011 — all these events had unpredictable, shocking, and massive impacts on the financial and business worlds. 

Now there’s the Novel Coronavirus (2019-nCoV) to reckon with:

“The Dow Jones Industrial Average fell over 350 points on Friday, February 28th, dropping over 1%, as worsening fears of the impact of the Wuhan Coronavirus grew,” explained Heather R. Morgan of Inc. magazine. “During the week, the Dow dropped over 12%, which was the biggest loss as a weekly percentage since the 2008 subprime mortgage crisis. People are starting to panic, both about the disease itself as well as the possibility of economic contagion from the outbreak that might lead to a possible recession.”

The coronavirus outbreak also sheds light on an unexpected vendor risk — geographic concentration risk. Vendor concentration risk is an organization’s overreliance on a single vendor or geographic region. How can you know if one or more or your vendors will be affected by the coronavirus? And how do you ensure your vendor network is prepared to handle such a disaster?

Expect the unexpected

A Black Swan event as unprecedented as the Coronavirus can seriously disrupt your service and supply chains.  Do you outsource to a single vendor for multiple critical business services or to several vendors near one another? For example, if you’re in the healthcare industry, you’ll want to know which regions will contain the highest shortages of surgical masks so you can better plan inventory.

Additionally, you might want to know what call centers will be most impacted by high absenteeism due to sickness. It’s essential to recognize any government intervention impacts such as possible payroll tax cuts, paid sick leave for hourly employees, and travel bans. Centralizing so many services and vendors will ultimately impede your ability to deliver to your own customers.

What if you feel confident you’ve significantly limited your vendors’ concentration risk? You can’t be completely certain if you haven’t considered your vendor’s vendors — your fourth-party vendors. You’re in trouble if three of your vendors are seemingly unaffected by the coronavirus, but they have each outsourced a service or other deliverables to a common vendor.

How can you manage the challenge of geographic concentration risk? Documentation is critical. You need to be able to easily identify your vendors and their:

• Addresses for the primary supporting location and data center
• Products/services they provide
• Fourth-party vendors they utilize and their primary support and data center locations

You also need to ensure that at-risk critical vendors have business continuity planning and disaster recovery (BCP/DR) plans in place. The most effective way to insulate yourself against vendor risk?  With a robust vendor risk management (VRM) system.

A VRM solution helps you guard against the worst

Find a time-tested vendor concentration analysis tool for managing and mitigating the potential impacts of Black Swan events like the Coronavirus. This VRM software should have a geographical concentration risk feature map to identify and gather critical location data and documentation for key supporting vendors. As well, custom and pre-built reporting allow vital data to then be appended to your existing VRM tracking efforts.

A best-in-class VRM solution can also reveal your vendors’ BCP/DR practices. You can assess how vendors intend to respond to an incident such as the coronavirus. Do they have the right planning, defined policies, and procedures for managing staff and communication? You’ll have access to reports, quantitative scores, narrative content, and recommendations for proceeding to help you plan for the future.

Black Swan events are random and beyond anyone’s control. Who knows what risks COVID-19 will continue to pose to the financial and business world? Yet you can work to keep your own house in order by tracking and reviewing your third- and fourth-party vendors’ plans for disaster.